Southwestern Resources SWG CN
December 30, 2006 - 12:09am EST by
2006 2007
Price: 7.94 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 314 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Recently kicked out of the S&P/TSX Capped Gold Index, this former high flying gold stock has now become one of the cheapest gold stocks out there.  Its early promoters, excited by the prospects of its Boka deposit in China, have faded away. Delays and the nuts and bolts of deposit development could not provide the needed adrenaline rush required by momentum investors.


As it stands SWG is looking at a 5 million ounce resource at its Boka deposit in China – a world class fined that should attract any gold company interested in the region. This number is likely to grow far larger with additional drilling and pending assay results. With an enterprise value of $C 284m, this deposit alone is being valued at only $C 57 per ounce.  Companies such as Eldorado (albeit in production) trade at a market cap of $US 1.6B with 350k ozs of production and 7m ozs of reserves.  SWG is a development stage company, but the dramatic difference in caps illustrates the upside potential of successful execution. Should SWG reach its production goal of 350k ozs of gold, and trade at a similar valuation, its stock would trade at several times its current price.


Southwestern is an exploration company focused on China and Peru. Their operating model is to find and sell, rather than operate mines. Having said that, it is sometimes necessary to take steps to put a deposit into production in order to secure the best price. Major gold companies love to see juniors stumble as they try to leap financing and construction hurdles. Once they see that the deposit is likely to actually start cash flowing, they strike. My feeling is that the Boka project or even the whole company will be sold or monetized somehow in the next 18 months. The details of the various projects SWG has going are available on the company’s website  The details of their many projects, while very interesting, are beyond the scope of this note. Any number of them has the potential to generate the kind of excitement that can lead to dramatic share price performance.



46m shares out
49m FD
$C 85m cash and shares on balance sheet
Looking only at the Boka project in China, SWG has:


5 million ozs of gold resource

Production expected of 350k ozs per year at a cash cost of less than $200 oz

            The industry comes in at around $280, I believe.

Initial Capital costs are estimated at $235mm

185mm USD year Cash Flow @ 550 Au, = USD 870mm NAV @ 0% discount rate

 Vs/ a market cap of US 314m.  


There remains plenty of blue sky exploration potential at Boka, not to mention the thousands of square kilometers of company owned and JV ground in China and Peru.



China Gold Space Heating UP


Takeover activity in the mining sector has heated up

 - started in China with Afcan’s acquisition by Etruscan

A substantial valuation umbrella has unfolded for China focused gold stocks:


            The Hong Kong IPO’s of Lingbao Gold and Zhaojin Gold with fanfare formerly associated with Internet stocks. The frenzy was ascribed to “the limited number of Chinese gold plays”. Zhaojin trades in Hong Kong with a $2.9B market cap, while Lingbao sports a 2.25B USD market cap. Investment bankers are usually pretty good at addressing valuation disparities, especially when there are fees to be earned on top of the arbitrage. With relatively poor quality assets and flat production profiles, these companies are in need of something exciting to talk about.  If these entities could come up with cash through an issue of their inflated currency, they could be potential buyers of the Boka project.


Silvercorp (SVM  CN)– a Canadian listed, Chinese silver play with a  $828m MC – added to S&P/TSX at the time SWG was dropped




Impressive Partners


SWG boasts a veritable “Who’s Who” of resource companies as partners in their various projects. Typically a major company will not get involved in a project unless they see the potential for a world class deposit in the particular metal. Most junior resource companies would be overjoyed to have attracted even one of the companies SWG has. With some judicious hype, they would most likely easily achieve the market cap that SWG currently has.


Newmont – took an equity stake in the company at 7.50 per share 3 years ago.

                   Exploration JV in Yunnan China and Liam project in Peru


Penoles – silver project in Peru

Xstrata – copper project in Peru

Anglo – Antay copper project in Peru. Also bought SWG stock @ 9.52 per share.

Inco – Nickel project in China

Meridian – gold project in Peru

Others with foreign companies whose names aren’t quite as well known



Management   - Capable and old

I don’t know CEO John Paterson’s exact age, but he has white hair and has expressed a desire to go fishing. Paterson has a long track record of successful exploration.  He controls 17.5% of the stock and has been in the market buying. In the last six months, he has purchased over $300k of stock. I would remind everyone that insider trading rules and enforcement are much laxer in Canada than they are in the U. S. I would also note that insiders were savvy seller at higher prices.

In addition the company has been buying back stock-unusual for a gold company.


Sprott Asset Management is a major long term shareholder that is well regarded in the junior mining sector




That Boka doesn’t get proved up; i.e. that there’s enough devil in the details that the economics don’t pan out, despite the impressive grades and size.

Further delays-always a consideration with mine development

Peru Risk – very real, but companies like Newmont, Southern Peru Copper and   Buenaventura maintain healthy valuations despite their location.

China Risk – but everybody loves China now



Drill program getting more active on several existing and new projects.

5 rigs on Boka to increase ounce count

Feasibility data from Boka should increase confidence

sale of company or major projects 





Drill program getting more active on several existing and new projects.

5 rigs on Boka to increase ounce count

Feasibility data from Boka should increase confidence

sale of company or major projects
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